Bank of Canada sees CBDC as payment, competition and innovation

By Ledger Insights

On The Web

21 July 2021

The Bank of Canada published a report discussing the key motivations for a central bank digital currency (CBDC). The paper detailed the primary benefits of developing a Canadian digital dollar: increased competition amongst payment service providers and digital innovation.

The authors identified two primary triggers for issuing a CBDC, the first being a declining use of cash that is not currently on the horizon. The second is the role of a CBDC in responding to the surge of alternative digital currencies, which could threaten Canada’s monetary sovereignty.

“Overall, the likelihood of the widespread adoption of an alternative digital currency not denominated in Canadian dollars remains small. Granted, the risk of this scenario has increased with the rapid development of other CBDCs and the efforts of consortiums such as Diem to launch a global stablecoin arrangement.”

Canada’s focus on monetary sovereignty echoes that of other countries working on or considering a CBDC. Although private currencies were mentioned, stablecoins were not the focus. However, when Facebook first unveiled Libra (now Diem), this seemed to spur an acceleration of China’s research into central bank digital currency and the country has since warned against stablecoins. Though still undecided on a central bank digital dollar, the United States Fed Reserve Chair also believes that stablecoins need regulation.

On the topic of competition, the paper identified three areas where the existence of a CBDC might enhance competition. These were in commercial banking, retail payments and big tech. A CBDC would mean banks have to offer value-added services over and above what’s available from a central bank currency. The report was not concerned about the risk of commercial bank disintermediation. Instead, it sees a CBDC as healthy competition to the largest banks.

When it comes to debit and credit cards, the central bank highlighted the high costs to merchants. “A CBDC could be a simpler competition policy tool because it would provide an alternative low-cost payment instrument for customers and merchants.” The authors were keen to use CBDC as a competition tool rather than regulation.

Overall, the paper is optimistic about the development of CBDCs, though concluded with a slightly cautious summary, “A CBDC might be beneficial and probably necessary to ensure a competitive and vibrant digital economy”.

Meanwhile, last week China released a whitepaper providing further clarity on its digital yuan, which it states is mainly designed for domestic use but with cross-border payment in mind. The Bank of Korea is also making strides, having announced the winning provider for its CBDC blockchain simulations yesterday.

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